Forex - Westpac Morning Report

Morning Report Tuesday 6 August 2013

Market wrapGlobal market sentiment: Markets were more contained last night, US data and Fedspeak helping US interest rates firm slightly. The non-manufacturing ISM report beat consensus. Fed hawk Fisher predictably said tapering should start in September, but more interestingly said the FOMC was closer to that action. Equyities largely tracked sideways, the S&P500 currently down 0.2%.

Interest rates: US 10yr treasury bond yields rose from 2.60% to 2.66% during the London session, the ISM data clearly helping.

Australian 3yr government bonds yields rose from 2.46% to 2.53%. The 10yr yield rose from 3.60% to 3.69%.

Currencies: The US dollar index is little changed. EUR initially fell from 1.3300 to 1.3233 but bounced in NY to 1.3265. USD/JPY initially rose from 98.30 to 98.78 but then fell to 98.27. AUD recovered from its post-retail sales slip, from 0.8880 to 0.8924. NZD recovered from its own negative story (Fonterra product recall), firming slightly to 0.7818. AUD/NZD ranged sideways between 1.1400 and 1.1480.

Economic wrapUS ISM non-manufacturing rose from 52.2 to 56.0 in July, matching February’s high for the year. Business activity and orders both jumped to their highs for the year so far, but jobs growth slowed.

Euroland Sentix investor confidence improved 8 pts to -5 in August, its second highest for the year after Feb, and the Euroland PMI composite was revised up from 50.4 to 50.5 in July, despite a downward revision from 52.5 to 51.3 in the German services PMI headline. Euroland retail sales fell 0.5% in June, their fourth month in five without a gain, to be down 0.9% yr.

UK services PMI jumped from 56.9 to 60.2, beating even Westpac’s top end forecast and the highest since late 2006, as Royal Baby mania and summer heat madness boosted activity and optimism in the services sector.

Market outlooksEvent risk today: The local highlight today will be the RBA meeting, the consensus expectation (and 100% priced in by markets) being a rate cut to 2.50%. There’s also Australia’s trade balance and house prices. For NZ, it’s worth watching the GlocalDairyTrade auction tonight for any effect of Fonterra’s product recall on milk powder prices. US data tonight is minor.

NZD/USD 1 day: Near term trend remains downwards, any bounce today probably capped by 0.7930.NZD/USD 1-3 month: The downtrend since April should resume (confirmed by a break below 0.7684) and could run as far as the low 0.70’s. Fed tapering expectations will remain a depressant.AUD/USD 1 day: Near term trend remains downwards, any bounce today probably capped by 0.8970. That is unless the RBA remains on hold (unlikely), igniting a major short-squeeze.AUD/USD 1-3 month: The downtrend since April has resumed and targets the low 0.80’s eventually. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.AUD/NZD 1 day: This corrective bounce persists and could run to 1.1545 during the week ahead.AUD/NZD 1-3 month: The downtrend since March remains strong and targets 1.1000 during the months ahead. Relative fundamentals (e.g. RBA easing to 2.0% vs RBNZ stuck at 2.5%) favour the NZD medium term.NZ swap yields 1 day: In response to changes in US and Australian bond yields overnight (see above) the 2yr should open up 5bp at 3.35%. The 10yr should open up 2bp at 4.63%.NZ swap yields 1-3 month: The uptrend since June 2012 remains intact. By late-2013 we would expect to see the 2yr above 3.40% based on NZ’s improving fundamentals and eventual RBNZ tightening in 2014. The US-influenced 10yr yield has also confirmed its uptrend and targets 4.68% next.

Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (NZ division). Information current as at 6 August 2013. All customers please note that this information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Australian customers can obtain Westpac’s

financial services guide by calling +612 9284 8372, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without

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